Canada, United States will focus on bilateral NAFTA negotiations

The Ambassador U.S./Canada bridge and border crossing at Windsor, Ont. and Detroit, MI on July 11, 2014. Canada and the United States will focus on bilateral negotiations as part of President Donald Trump’s pledge to tweak the North American free-trade deal that governs Canadian commerce, leaving Mexico essentially to fend for itself.

Canada and the United States will focus on bilateral negotiations as part of President Donald Trump's pledge to tweak the North American free-trade deal that governs Canadian commerce, leaving Mexico essentially to fend for itself.

The signals coming from Washington are that there will be an American negotiating team dealing with Canada and a separate one for Mexico, according to one of the principal players in the high-level Canada-U.S. talks, speaking to The Globe and Mail on background.

"We think there are going to be things that they will come to us and get them straightened out and then the Americans can say to the Mexicans, 'We have this negotiated with the Canadians, are you okay with this?'" the insider said. "There are things that can only be solved by bilateral negotiations."

Canada, for example, expects to first hammer out an agreement on independent dispute mechanisms – a key U.S. demand – with Washington before it is then presented to Mexico.

The source said Prime Minister Justin Trudeau does not want Canada to be caught at the negotiating table when the Americans go after Mexico for its huge trade surplus with the United States and other issues that Mr. Trump campaigned on in the election.

"We don't want to be part of the triumvirate when the item is [Mexico] drugs coming into the United States, illegal immigration or building a wall," the insider said.

Canadian trade lawyer Lawrence Herman said this is a significant achievement for Canada, which he said needs to avoid being embroiled in resolving Mexico's contentious disputes with the Trump administration.

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"Canada-U.S. issues are very different from the U.S.-Mexico issues so I think we can best deal with the issues bilaterally and I don't think we can help the Mexicans solve their bilateral problems with the United States," Mr. Herman said.

But John Weekes, a trade lawyer who helped negotiate NAFTA, warned it could backfire if Canada attempts to cut the Mexicans out of trilateral talks.

"A lot of people think we would be better off if we can sit down and negotiate bilaterally with the Americans, but I am not of that view" he said. "The advantage of having someone else in the room, especially if you are going to be the target, is that we won't get as much attention as the Mexicans do and that's not a bad thing."

Canadian officials say Mr. Trump's nominee for Commerce Secretary, Wilbur Ross, who will be over all in charge of trade negotiations, and the President's son-in-law, Jared Kushner, have made it clear to the Canadians that they want changes to independent dispute mechanisms and country-of-origin rules.

The United States is particularly unhappy with NAFTA's Chapter 19, which allows any of the partners to request a binational panel review of unfair trade practices.

Canada is prepared to propose a permanent panel of judges chosen by each country to replace the independent experts that are currently selected to administer Chapter 19 panels.

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NAFTA's Chapter 11 investor-state dispute mechanism, which Canada does not believe has worked in its favour, will also be on the table. Chapter 11 allows investors to sue foreign governments without first going through legal proceedings in that country.

"They were designed really to give investment protection to American investors in Mexico and they have been used against Canada," Mr. Herman said.

Country-of-origin rules – which govern how much content from outside NAFTA a product can contain and still qualify to be shipped duty free – can't be negotiated separately since supply chains are spread across three countries now.

"While this is on the American agenda, our sense is that this applies much more to countries like China than it does to Canada or to Mexico," the source said.

Mr. Ross has argued that Chinese auto parts are being shipped to Mexico to be put in cars that are sold in the U.S. market. He also singled out low wages that led U.S. manufacturers to flock to Mexico.

The Trump White House and advisers such as corporate titan Stephen Schwarzman, head of the President's strategic and policy forum, have told the Trudeau government that two-way trade is generally balanced and Canada's manufacturing industry remains competitive with the United States. Canadian officials have reinforced this message, noting that the United States has had a small trade surplus since 2007 if energy exports are subtracted.

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At the White House on Monday, the President and Mr. Trudeau talked about ways to improve NAFTA through bilateral measures such as upgrading the electrical grid, cargo preclearance, energy integration and other cross-border initiatives to create jobs.

"Trump talked about improving NAFTA for both countries [Canada and U.S.] and you could improve NAFTA in terms of facilitating cross-border movement. You could simplify all the technical aspects of rules of origin," Mr. Herman said. "You could deal with e-commerce, which NAFTA doesn't deal with – the whole spectrum of electronic trade is only covered in a very modest way. The services sector could be enlarged [to allow] a greater transborder flow of services and personnel, including high-tech people working on both sides of the border."

A Canadian official said Mr. Trudeau did not get a clear idea from Mr. Trump on when NAFTA talks would formally begin. Canada and Mexico have yet to receive a formal letter of notification from the White House and the areas the Americans want to tackle.

The White House must deliver 90 days notice to Congress to begin negotiations.

Video: While Trudeau and Trump praise Canada-U.S. trade agreements, the president adds ‘we’ll be tweaking it’

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